In the war sketch in the 1960s British review, "Beyond the Fringe", the officer says to Perkins: "You know how in a game of football, 10 men often play better than 11? Well, Perkins, we're asking you to be that one man. I want you to lay down your life. We need a futile gesture at this stage. It’ll raise the whole tone of the war." This is our view of the Euro at a time when the media is writing its epitaph. Why should the Euro be imperilled by the departure of its weaker members? Surely currency baskets gain when basket cases leave? The big loser then may be Germany, which explains its official posturing. After all, it’s a decade of increasing German competitiveness that has stretched the currency relationships to breaking point. But no German politician wants to proclaim the interests of Siemens or Daimler to its electorate or to its political "allies". A better policy is to mouth outrage against lazy Greeks, preach the virtues of German fiscal responsibility and brace exporters for the strengthening of the Euro as its composition improves. The surprise survivor of the Euro Crisis may be the Euro and the surprise casualty its strongest member.

The median analyst forecast for Commerzbank (CBK: GR) in 2013 produces a PER of 0.4x (the top end is a PER of 0.7x and the bottom 0.2x). Analysts who spend their lives looking at European banks say you can buy the whole of Commerzbank for a price equivalent to what it’ll make from January to March. Something is wrong here. We know that Commerzbank has a massive need for capital, and maybe nationalization, but why do analysts who predict 3 years of profitability -step forward UBS- still make it a "sell"? The explanation may be more behavioural than analytical (and perhaps even "seasonal"). The European banks’ index has fallen by over 80% in 3 years; which analyst wants to go into bonus-time flagging the turn in a potential disaster zone? If there’s no future for Commerzbank from these levels, people have to worry more about their own economic futures than making a misplaced bet on European bank recovery. This bleak future encompasses cans of baked beans, an air raid shelter and a loaded machine gun. Don’t forget the can opener. Has the risk of investing in European banks now gone asymmetric?

2011 has been a private hell for fund managers. Not the hell that comes from down markets, bad enough on its own. Rather, "megacap" Dividend Aristocrats did too well. Our basket of high yield megacaps (Kraft, Unilever etc) is up this year, but small-cap growth stocks in growth markets are down by about -30% on average. This phenomenon, extraordinary in its scale and duration, is worsened by short-termism. Investors are redeeming under-performing small cap and growth funds; this in turn puts downward pressure on small cap growth stocks. Fund managers, boxed in by redemptions and pressure to "out-perform", are forced to sell small cap growth and buy large cap quality to save their jobs. Because high quality "autonomies" have had good earnings, valuations have improved in 2011 –and competing bond yields have collapsed- so the argument for buying is stronger than ever. When will reversion to the mean bail out the small cap sector? The "Nifty Fifty" phenomenon of the 1960s and ‘70s lasted well over 10 years.

"S Chips" are Chinese stocks that are quoted in Singapore. There has been monkey business –unpaid debts, economy with the truth on asset backing etc- and the entire sector is presumed to be illegal, immoral or fattening. Stock ratings have cratered and that includes our "Developing China" theme stock, Eratat Lifestyle (ERAT: SP). ERAT has moved into selling lifestyle apparel for "Chuppies", a good business, and away from flogging sportswear, a bad one. In the process, it has had to finance the new formats of its distributors and trade receivables have ballooned like my son’s outsized Trackie Bs. ERAT says such bad debts are unknown in China but fear of monkey is stronger than greed for money. Yet, margins are growing and broker Kim Eng says ERAT trades on a PER of 2x and has a market cap of USD 35mn. That makes it either the bargain of the year or another sad case of "Good Governance Is All".

Long distance flights to Singapore from Europe make for tough travelling, but a visit to the Morgan Stanley Asia Summit should calm nerves. Not so. A client rings from Singapore to report that the Euro is finished and "can we increase his dollars and buy US treasury bonds?" We oblige. I am appalled to see that in paying for a bond yielding 0.125%, our client has paid the bank 0.1% (or 80% of the coupon). Another example of agency costs that give our industry a bad name, but the highest cost –and an invisible one- is the loss to the global economy of productive capital caused by fear. This is what politicians and central bankers must address, or they should fear for their jobs.


This diary (the "diary") is published by Global Thematic Investors Limited, a company domiciled in Hong Kong and incorporated under the Hong Kong Companies’ Ordinance on the 15th September, 2005. The diary is not intended for private customers and is written to be read solely by sophisticated investors, such as family offices, business corporations, banks and financial intermediaries. Statements are completely personal and may change without notice, are often forward-looking and therefore subject to uncertainty and risk. The predictions and forecasts implied may not subsequently be achieved. The diary is composed of information and opinion believed to be accurate, though this information may not have been verified. Funds or collective vehicles may only be open to certain persons in certain jurisdictions and may follow strategies that are speculative and involve a high risk of loss and may go up as well as down (a favorable performance record is no indication of future performance).